So Let’s Look If BNPL (buy now pay later) Needs to Be Regulated?
Buy Now Pay Later (BNPL) has surged in popularity among consumers over the last few years, with fintech lenders Klarna and Afterpay being two of the most popular choices amongst consumers. While they are certainly convenient and easy to use, there have been question marks over BNPL providers’ ethics because they encourage and normalise overspending. These issues have left many people calling for BNPL providers to be regulated. So, should they be? That’s exactly what we’re going to explore in this article.
What is BNPL?
BNPL providers allow users to spread out the cost of a particular purchase. If consumers don’t want to pay instantly for an item, they can simply use a BNPL scheme and pay the money back at a later date. The timeframe in which users have to pay back varies, but it is usually between 30 days to 12 months. Consumers are largely drawn to BNPL due to the fact these schemes don’t charge interest, although late fees are usually charged.
The Issue With BNPL
The primary issue with BNPL is that these products often lead to consumers overspending and causes them to fall further into debt. An investigation by Which found that nearly 25% of BNPL users spent more than they had planned because the service was available. While charities like Stepchange have seen a spike in the number of people coming to them with BNPL related debt. As more people turn to BNPL, particularly due to the COVID-19 causing further financial hardship, it looks likely there will be an increase in the number of consumers falling victim to BNPL fees.
It is currently too straightforward for customers to sign up to BNPL providers, and many do not understand the implications that occur if they fail to keep up with their agreed payments. Regulators need to address these issues to help further protect consumers.
The Argument For BNPL Intervention
Presently, the BNPL industry remains unregulated despite growing calls from debt charities for reform. These products are allowed to stay unregulated because BNPL providers do not charge their customers interest. As a result, they can evade regulators around the world like the Financial Conduct Authority (FCA) and Australian Securities and Investments Commission (ASIC).
As they remain unregulated, they also don’t have to check if you can afford the credit, which is a significant issue. This opens up the service to anyone, and if not used responsibly, BNPL services can cause their users to get into debt and negatively impact their credit score.
We see this issue unfold currently. BNPL provider, Afterpay, charged their customers $46 million in late fees in the 2019 financial year. This is a staggering fee, highlighting how many people simply don’t understand what they are entering into.
Other issues include the fact they don’t need to follow consumer protections like responsible lending or offer hardship to customers struggling to make repayments on time.
These are all significant issues, which is why governments need to come in and regulate this industry. However, it’s important that they strike the right balance of protecting consumer rights without crushing innovative financial products.
Final BNPL Thoughts
BNPL providers certainly serve a purpose. They are flexible and convenient and allow consumers to cover essential spending, such as groceries and healthcare. However, it is an industry that requires better protection for consumers and for that reason, we believe it needs to be regulated.